Investing in Mexico’s Infrastructure

President Enrique Peña Nieto has given himself a rather large stack of homework. As part of a countercyclical economic strategy to maintain Mexico’s GDP growth, which is projected to have climbed 0.9 percent between 2013 and 2014 respectively, the federal government is betting on the National Infrastructure Program 2014-2018 (NIP) to increase competitiveness and productivity. The 743 projects involved will be worth $596 billion by 2018 through embracing six strategic sectors: energy, transport, communications, health, water, urban development, and tourism.

“With better infrastructure, more investment, and transformational reforms, our nation will be able to grow at its full potential,” Peña Nieto told the Financial Times. According to Secretary of Finance and Public Credit Luis Videgaray, the NIP could bolster the economy 1.8-2 perceptual points above the present level (1.1 percent) by the end of 2018, implying the creation of 350,000 new jobs every year.

The program includes projects such as Mexico City’s new airport—planed to be one on the largest in the world, a 210-kilometer long high-speed train from Mexico City to Querétaro, a transpeninsular train from Merida to Playa del Carmen via Cancún, the second phase of gas pipeline Los Ramones, and combined cycle power plants.

Of the total budget, a little more than half is concentrated on energy infrastructure, followed by urban development taking up about a quarter, and communications and transport comprising 17 percent. Combined, these three sectors account for more than 90 percent of the programmed investment.

In terms of financing the NIP, the Mexican government will cover 63 percent of the programmed investment and the rest will come from the private sector. The opportunity for private participation is a refreshing policy laid out as part of Peña Nieto’s 11 structural reforms, including changes to education, energy, telecommunications, electoral legislation, banking, anti-trust, and taxes.

In line with the reforms, some analysts argue that because of the new federal public-private partnership law, many investors are enthusiastic about the success of the infrastructure program. In fact, Moody’s credit rating for Mexico was unprecedentedly raised to A3 after the economic structural reforms were passed early last year.

The credit upgrade positively affects the whole country, and banks such as Banamex have announced an expansion of their credit portfolio to $10 billion for energy infrastructure projects. Other financial institutions such as Banorte, Santander, HSBC, and BBVA, have also expressed their interest in financing infrastructure projects, according to El Universal.

Along with the financial and credit institutions, the program benefits a wide range of local companies. Mexican construction firm ICA, Carlos Slim’s Grupo Carso, Cemex, Mexichem, and Grupo Mexico SAB, are among the companies that will profit from the National Infrastructure Program.

But not everything about the NIP is so encouraging. The land structure in Mexico divided by Ejidos (an area of communal land used for agriculture, on which community members individually possess and farm a specific parcel) may interrupt and generate delays in energy and transportation projects. “The social tensions with respect to the NIP, could come from topics associated to the property of the land rather than from environmentalists,” said Carlos Petersen, Eurasia political risk analyst for Latin America.

Moreover, perhaps the most relevant challenge is the low international oil price, which continues to hurt the emerging market economies. With Brent crude oil below $50 a barrel, it is rational to believe that private investment on energy infrastructure, such as exploration and exploitation now allowed in México by private investors, would decrease accordingly. However, price volatility doesn’t seem to affect the overall investment of large corporations in energy projects, as some Mexican analysts note.

“Companies look at cycles rather than current prices to make their investments. Organizations don’t seem to be affected by short-term volatility,” said one such analyst at Golman Sachs Mexico, adding that oil prices are likely to recover by the end of 2015.

Beyond predictions and good intentions, Peña Nieto’s government needs to start delivering results. His administration is facing low approval rates, corruption scandals, insecurity, and the political unrest following the execution of 43 students in Ayotzinapa by cartel captors. Against that backdrop, investing in infrastructure may be the best option to improve Peña Nieto’s reputation, find solid foundations to reactivate Mexico’s economy, and have a fighting chance in the 2018 elections.

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Cristobal Vasquez is the former economic and finance reporter at World Policy Journal.